- 20 Marks
MI – May 2018 – L1 – SB – Q3 – Decision-Making Techniques
Evaluating make or buy decision based on quantitative and qualitative factors for Seagull Fabricators Ltd.
Question
Seagull Fabricators Limited buys a component for N280 per unit, 6,000 units of which it uses monthly. Below is the cost of making the same component in-house:
| Component | Unit Cost | Total Cost (N) |
|---|---|---|
| Direct Material | 100 | 600,000 |
| Direct Labour | 100 | 600,000 |
| Variable Overheads | 50 | 300,000 |
| Total | 250 | 1,500,000 |
In order to produce the component, the company would purchase a mould for N5 million with an estimated life span of 5 years. An annual rent of N1 million is required for the fabrication space and the cost of power consumption is expected to increase by N500,000 per year.
a. You are required to advise the company whether to discontinue the outsourcing of the component and commence local fabrication or not, based on the given quantitative factors. (11 marks)
b. In deciding to outsource a component, explain THREE qualitative factors to be taken into consideration. (9 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Costing, Decision Making, Make or Buy
- Level: Level 1
- Topic: Decision-making techniques
- Series: MAY 2018